Month: November 2013

Each weekend, I analyze market conditions using sentiment and technical indicators. The goal is to determine if we are in a bullish, bearish, or sideways market environment. *

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Analysis: Investor sentiment has decreased while financial writers enthusiasm has increased. One group will be right, and so far it is the financial writers and money managers. VIX remains in the complacent zone, which reflects the bullish bias, as well as an attitude the Fed won’t be tapering anytime soon. The most bullish indicator is moving averages, and the market trend is clearly in an uptrend. The most significant development this week is the spike in the 10-year yield, which is pressuring bonds.

Opinion: This will be a shortened week because of the holiday, so trading should be light. As we enter the holiday season, it appears as if the market will give us that Christmas rally. The trend is up, the Fed is being cooperative, and sentiment is generally subdued.

For your information, retailers are giving out fantastic deals before and during Black Friday, including 50% and 60% discounts. Perhaps it’s because of the shortened shopping days (compared to last year), or that retailers are desperate. It’s too early to say for sure, but I’m stunned at some of the deals (especially in clothing).

There are also a few lumps of coal looming in the background. First, as the yield on the 10-year rises, bond prices go down. In a week or so, bond mutual fund investors will open their statements and see losses. As the yield climbs to 3 percent, those losses will increase. In fact, 3 percent will be a significant turning point in the bond market, and the media will announce it all day.

When the yield does hit 3 percent in the future, and bond losses increase, bond investors have choices: Stay put, move to cash, or move to the stock market. Many believe bondholders will move to the stock market to chase after higher returns. Others think they will move to cash. I have no idea what bondholders will do, but I know this: The 30-year bull market for bonds is coming to an end, and the financial world will change.

Another distressing development is emerging markets. The Chinese say they are on the right track, and investors believe them. As a result, the Chinese stock market is in bubble territory (up 20 percent in four months), and bubbles never end well.

Meanwhile, other emerging market countries are in deep economic trouble (Brazil is the latest). Even some European countries are showing more signs of trouble (i.e. France). I’m not sure how this will play out, but if there is going to be a market correction, the catalyst will likely come from emerging markets or bonds. The clock is ticking for both, and it will not be pretty.

How will this affect the U.S. stock market? The positive view is that the U.S., although not out of the woods, is stronger than everyone else. In addition, you can’t fight the trend, and the trend is up. The negative view is the world’s problems, as well as a bond dislocation, will negatively affect our stock market. Seems obvious, right? Except that our stock market has so far been bullet proof. It’s possible that as the world’s problems increase, investors will flock to the U.S. for safety.

The world is a dangerous place, and an unknown catalyst can cause a correction or major pullback. With the holidays approaching, the bulls have the edge, but it may not last long.

Bottom line: The market moves higher, ignoring all of the bad news. This is a classic bull market. Nevertheless, as bond prices fall, as emerging markets struggle, and as the Fed tries to figure out what to do next, caution is advised. The advice from Bernard Baruch is still brilliant: When asked how he made so much money in the stock market, he replied, “Because I sell too soon.”

Have a great Thanksgiving!

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.

Each weekend, I analyze market conditions using sentiment and technical indicators. The goal is to determine if we are in a bullish, bearish, or sideways market environment. *

A full list of the major indicators with signals can be found in my book, All About Market Indicators(McGraw-Hill).) I’m also the author of the best-selling Understanding Options (McGraw-Hill), Understanding Stocks (McGraw-Hill), and Start Day Trading Now (Adams Media).

Analysis: Sentiment is still on the high side, but individual investors lost some of their enthusiasm. VIX remains in the complacent zone, and RSI is overbought. Add it up and you get a mixed message: Sentiment is frothy but not extreme, while indicators are leaning bullish (thanks to Janet Yellen). Bottom time: Investors believe the market will go up and the indicators reflect that enthusiasm. Market will go up until investor mindset changes.

Opinion: When the week began, everything was going according to plan. The 10-year yield was rising, bonds were getting hammered, and emerging markets were sinking. Then Janet Yellen stepped up to the plate. She was cool, calm, and forthright, and very impressive. She hit it out of the park at the hearings.

Janet said that QE will continue, there are no equity bubbles, and she reserves the right to taper in the future. As long as the economy is still struggling, she said, there will be no changes. Wal-Mart disappoints: Yeah, no tapering! Cisco’s earnings are terrible: Yeah! No tapering. Earnings are weak!: Yeah! QE will continue as far as the eye can see until it doesn’t.

After her testimony, emerging markets rallied, bonds rallied, and the U.S. market went up respectively. In the old days (three weeks ago), her testimony would have lit the market on fire. Maybe it’s because all of the buyers are already in the market. Some value investors are complaining they can’t find any bargains (I’d recommend going to Wal-Mart if you want bargains. Doors will be opening on Thanksgiving night).

As I said last week, only you can decide if the potential 5 percent rally is worth the downside risk. If you’re a money manager needing to lock in a year end bonus, you must be all-in for the rest of the year. If you’re a retail investor, you have a choice.

With indexes at all time highs, enthusiasm growing (mostly by the pros who really need this market to go up), and a belief that the Fed has your back, caution is advised. Even with the positive reaction to Janet’s testimony, the odds are still good that the yield will go up, and that emerging markets will go down along with bonds.

If you are compelled to put on your party hats and go after that last 5 percent, be careful. The good news is the Fed has your back. The bad news is everything else.

Bottom line: Although the technical indicators say the market is going higher, there are more than enough warning signs. With an overbought market, a feeling by many investors there is little risk (because of the Fed), and a sense the market wants to go up, it’s time to let up on the gas, in my opinion. If things don’t go perfectly, that last 5 percent could be the hardest you ever made.

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.

Each weekend, I analyze market conditions using sentiment and technical indicators. The goal is to determine if we are in a bullish, bearish, or sideways market environment. *

A full list of the major indicators with signals can be found in my book, All About Market Indicators(McGraw-Hill).) I’m also the author of the best-selling Understanding Options (McGraw-Hill), Understanding Stocks (McGraw-Hill), and Start Day Trading Now (Adams Media).

AAII survey (11/8/2013)

45.5% Bullish. 21.8% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

Investor’s Intelligence (11/8/2013)

55.2% Bullish. 15.6% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

CBOE Equity Put/Call Ratio: .51

Bearish: Less than or near .50 is bearish (more call options are being bought).

Bullish: Higher than or near 1.0 is bullish (more put options are being bought)

Analysis: Sentiment among retail investors and financial writers is bullish, especially for those in the financial press (which is a negative sign). Other sentiment readings are also reflecting complacency among investors, and a belief that there is little risk in the financial markets. That is about to change soon, in my opinion. MACD turned down a little as did moving averages. The big news this week was the 5% spike in the yield on the 10-year Treasury on Friday. Oh boy.

Opinion: That spike in the 10-year was very significant, and the financial world is going to change soon as the yield climbs towards 3%. When that happens (not if), bonds are going to get crushed, and there will be blood in the streets for investors holding bond mutual funds. The market always gives you one opportunity to get out of dangerous positions, and that opportunity is closing fast.

When (not if) bonds get smashed, it’s anyone’s guess what will happen to the equity markets. There are two theories: The first is that after opening their monthly statements, bondholders will run to the relative safety of stocks. The second theory is that stocks will plunge along with bonds. I’m not smart enough to tell you which scenario will occur, but it is going to be very interesting. Hint: I believe that emerging markets will also plunge along with bonds.

Investors believe the Fed has them covered and that there is little risk in stocks right now. In fact, it’s as if the market is giving away free money. To paraphrase G.M. Loeb in his classic 1935 book on investments: When Wall Street is giving away free money, it’s time to sell and move to cash.

That also reminds me of what Jesse Livermore said. To paraphrase: When the market is not acting like it should, change your strategy immediately. In my opinion, something very strange is happening in the market, and I can’t quite figure it out. I’m not sure what is going to happen, perhaps we’ll get to 1800 on the S&P in no time, but for the moment, I’m sitting this one out until things are a bit clearer.
Bottom line: Just when it seemed like the market isn’t dangerous, it is getting dangerous, but only a few see it right now. As for me, I question whether that 5 percent potential upside is worth the risk. I’m in the minority, however, as almost everyone else has their party hats on.

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.

Each weekend, I will list signals from some of the most useful market indicators.*

A full list of the major indicators with signals can be found in my book, All About Market Indicators(McGraw-Hill).) I’m also the author of the best-selling Understanding Options (McGraw-Hill), Understanding Stocks(McGraw-Hill), and Start Day Trading Now (Adams Media).

AAII survey (10/30/2013)

45.0% Bullish. 21.5% Bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

Investor’s Intelligence (10/30/2013)

52.6% Bullish. 16.5% Bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

CBOE Equity Put/Call Ratio: .61

Sell signal: Less than or near .50 is a sell (more call options are being bought).

Buy signal: Higher than or near 1.0 is a buy (more put options are being bought)

Analysis: Sentiment readings are on the frothy side (which is a negative sign), with newsletter writers in the super bullish camp. They obviously believe the Fed will continue to add liquidity to the markets with their bond buying experiment. Technical indicators are all bullish. The yield on the 10-year surged, which is not a good sign for bonds. There’s a rush out of bonds as we speak, and a rush into stocks.

Opinion: After staying on the sidelines for years, the retail investor, along with financial newsletter writers, discovered the bull market. As bond mutual funds lose money to rising interest rates, investors are pouring money into stock mutual funds. Inflows are at their highest in years. As mentioned above, sentiment indicators are sky high, and some analysts say the bullishness is thehighest since 2008 (right before the crash).

I’m amazed that it’s happening again, that is, panic buying. Remember that sentiment indicators can remain high for a long time. But it is a red flag, and there are many red flags. An orange flag: We haven’t had a 10 percent correction in two years.

Wait! Maybe it’s different this time, and because of the Fed, the market will never go down again! (Okay, I’m joking).

Here’s the way I see it: On one hand, this market could go parabolic as all that mutual fund money is put to work into the stock market. On the other hand, this market is also reaching a dangerous tipping point. Unfortunately, I can’t tell you which is going to happen first but since the market will be aTwitter next week (i.e. Twitter goes public), I assume we’re going higher. And the indicators are all pointing up.

And yet, remember to buy when others are afraid and sell when others are greedy (Warren Buffett’s words). Therefore, instead of getting caught up with the mania, if you want to reduce risk, you might want to slowly scale out of positions.

Nevertheless, if you do, you could miss out on a final climatic rally that could be amazing. No one, and I mean no one, believes the Fed will taper in December, so it should be blue sky as far as the eye can see. That is, unless interest rates spike, emerging markets implode, and if someone on the Fed tries to deflate the bubbly market by talking it down.

Bottom line: The market will likely go up but the risks increase each week. A market correction would not be a surprise, but you may have to wait a while.

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.

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